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Italian Industry, Twilight Of The Gods (Int'l Edition)

August 18, 1996

International -- European Business: ITALY

ITALIAN INDUSTRY, TWILIGHT OF THE GODS (int'l edition)

A scandal touching Italy's Big Three signals the end of an era

Gianni Agnelli, the 75-year-old patriarch of Europe's most powerful industrial dynasty, was no doubt happy to leave Monte Carlo's exclusive Monaco Heart Center on Aug. 3. After surgery to replace a heart valve, the former Fiat chairman was looking forward to resting at his Villa Perosa estate in the hills above Turin. "He's in great spirits," says a close relative.

Agnelli has not run the auto giant's day-to-day operations since last February, when he handed the chairmanship over to longtime aide Cesare Romiti. Yet he still dominates Italy's corporate Establishment as the authority figure behind Fiat, the country's industrial powerhouse with $50 billion in sales. His presence also looms over Mediobanca, the secretive Milan merchant bank that is Fiat's financial backbone. With its cross-holdings in industry, banking, and insurance, Mediobanca is also the nerve center of Italy's corporate network.

But the ground is starting to shift under these institutions. At Fiat, Romiti will retire in 22 months when he turns 75. At Mediobanca, the career of 88-year-old Honorary Chairman Enrico Cuccia is drawing to a close. "The Big Three of Italy are leaving the scene," says a former Fiat top executive. "And that means uncertainty, because no one enjoys anywhere near their authority."

In a country where family control of businesses is more intensely personal than anywhere else in Europe, generational change at Fiat and Mediobanca is bound to cause unease. But the passing of the baton could also be tainted with scandal. Gemina, the Milanese industrial and financial holding company in which Fiat and Mediobanca have long been major players, now faces potential criminal charges for irregularities that could include falsified balance sheets, tax evasion, and insider trading. Gemina officials say they will not comment publicly on the investigation.

Indeed, the profound changes that shook up Italy's political old guard are now sweeping through the business world. Big corporations, which often managed multimillion-dollar slush funds, have largely cleaned up their acts. Foreign investment banks and pension funds are more active than ever on the Milan bourse, insisting on transparency. And privatizations, such as the projected sell-off next February of state-owned telecommunications giant Stet, stand to create new centers of corporate power.

CROWNING ACT. Neither Fiat nor Mediobanca will comment on the Gemina scandal until the investigation is complete. Although indictments seem highly likely, Agnelli, Romiti, and Cuccia will probably not be affected directly. But the Gemina affair has already done damage. Take Cuccia's ambitious plans, encouraged by Fiat and announced with fanfare last September, to have Gemina absorb multibillion-dollar chemical and other companies controlled by Fiat along with the Montedison industrial empire. The merger of nine public companies would have created Italy's largest private group after Fiat, with some $24 billion in sales, and would have been the crowning act of Cuccia's career.

But it was not to be. Barely three weeks after the merger was announced, Gemina stunned the market with news of massive, unexplained losses at its Rizzoli publishing unit. Only days before, Gemina management had painted a rosy picture of a turnaround at Rizzoli. Gemina shares, essential to securing the merger's no-cash stock swap, plunged in value as investors bailed out.

Then Italy's tax police raided Gemina's neo-Renaissance headquarters in Milan, carting away thousands of documents and computer records. That afternoon, prosecutors announced that 10 top Gemina managers were under investigation on charges of allegedly falsifying company balance sheets to hide losses. The documents provided fodder for the broader upcoming investigation. Cuccia's master plan was history.

BIG LOSSES. It was a clamorous defeat for Cuccia--and an embarrassment for Maurizio Romiti, Cesare's son and a top Mediobanca official who oversees Gemina's business within the bank. "The Gemina affair is a great loss of credibility for Mediobanca and is the beginning of the end of the system it has ruled over," says Salvatore Bragantini, head of Milan-based merchant bank Arca Merchant.

The bad news from Gemina seems endless. In June, management announced revised consolidated 1995 losses of $464 million, compared with $290 million in losses it had forecast last November. At its shareholder meeting at the end of June, company auditors refused to sign off on the group's balance sheets because Swiss- and Luxembourg-based shell companies owned by Gemina were holding off on opening their accounts. "The fact is, we still don't know how big the losses are," says Andrea Azzimondi, Italian equity analyst at Morgan Stanley in Rome.

The Gemina affair could affect the relationship between Romiti and Agnelli, who remains chairman of the shareholder syndicate that controls Fiat. Although the two have worked side by side for 22 years and publicly deny any rift, Romiti and Agnelli broke precedent by issuing contradictory public statements. In June Romiti said that family capitalism in Italy was coming to an end, implying that some of the blame for the Gemina affair belonged at Agnelli's feet. That brought a public rebuke from Agnelli, who warned Romiti to keep focused on Fiat and not get caught up in Italian politics.

Observers believe Agnelli may be trying to reassert control at Fiat. In May, the Agnellis agreed to pony up $230 million to buy back the 2% Fiat stake held by France's Alcatel Alsthom. Then Giovanni Alberto Agnelli, Gianni's nephew and choice for future chairman, suggested that Italian-style shareholding syndicates perfected by Mediobanca's Cuccia had outlived their usefulness.

Even if the Agnellis win the power struggle for Fiat's future, the new management style is unlikely to look like the old. In June, Gianni Agnelli pushed through the appointment to Fiat's board of Paolo Fresco, General Electric Co.'s Italian-born vice-chairman. Insiders say the Agnellis want to see Fresco replace Romiti as chairman in 1998, when Fresco turns 65 and must resign from GE. Waiting in the wings: Giovanni Agnelli, who runs his family's privately held Piaggio motor scooter group. Fresco's potential appointment would be a sign that Italy's business culture is changing.

"Fresco could make sense," says one banker close to the Agnellis. "He may know nothing about cars, but he's totally new, totally clean, and has had no involvement with the past." Considering the tortured recent story of Gemina, those may be the most important credentials the next generation of Italian business leaders can have.By John Rossant in RomeReturn to top